We apply machine learning methods to granular environmental variables and test if there is a strong positive relation between environmental sustainability and future stock returns. A long-short portfolio that longs stocks with high forecasted returns and sells stocks with low forecasted returns earns large abnormal returns, and it performs better when climate concerns in the media are more intense. Further diagnosis shows that various dimensions of environmental sustainability help return predictions. High forecasted returns are associated primarily with strong environmental operational performance. The return prediction based on a customized transformer model is similar.

We analyze whether tough IRS monitoring generates a positive externality by constraining managers' bad news hoarding activities. Supporting this prediction, we find a negative relation between the threat of an IRS audit and stock price crash risk. Our evidence is consistent with recent theory that outside investors learn more about firms when tax enforcement is stricter. Additionally, path analysis suggests that the monitoring channel (direct path) plays a critical role in shaping crash risk relative to information asymmetry channels of tax planning and accruals manipulation (indirect paths). Consistent with other predictions, we find that the monitoring role of IRS audits intensifies when firms experience worse agency conflicts stemming from CEO power and incentives. Collectively, our research implies that external monitoring by tax authorities protects shareholders against managers suppressing negative firm-specific information that engenders stock price crash risk, particularly when CEOs have wider scope and stronger incentives to hoard bad news.

In measuring tunneling with intercorporate loans disclosed by Chinese listed companies, we analyze the underlying channels through which aggressive tax planning facilitates the diversion of corporate resources by firm insiders. Using path analysis, we document that the path from tax aggressiveness to related loans is mediated by both the additional cash flows from tax savings and the increased financial opacity from tax planning, and that additional cash flows plays a much more important role than opacity in helping controlling shareholders to divert corporate resources under the guise of tax aggressiveness. Beyond the two mediated paths, we also detect a residual, direct path from tax aggressiveness to related loans. After an exogenous shock from the government crackdown on diversionary related loans, we find the direct path is fully mediated by the two indirect paths, suggesting that tunneling via related loans only occurs at firms where insiders can mask tunneling under the cover of opacity or can justify related loans on grounds of abnormal cash flows from tax savings. Our evidence supports the notion that greater outside scrutiny increases the hurdle for, but does not entirely eradicate, diversion facilitated by tax aggressiveness. Collectively, our research lends some support to recent theory on the importance of taxes to corporate governance by demonstrating how the agency costs of tax planning allow certain shareholders to benefit from firm activities at the expense of others.

During 2005 to 2007, the SEC ordered a pilot program in which one‐third of the Russell 3000 index were arbitrarily chosen as pilot stocks and exempted from short‐sale price tests. Pilot firms’ discretionary accruals and likelihood of marginally beating earnings targets decrease during this period, and revert to pre‐experiment levels when the program ends. After the program starts, pilot firms are more likely to be caught for fraud initiated before the program, and their stock returns better incorporate earnings information. These results indicate that short selling, or its prospect, curbs earnings management, helps detect fraud, and improves price efficiency.

Corporations often use affiliated firms as guarantors when issuing guaranteed bonds, thus combining external financing with internal credit enhancements. In this study, we empirically examine the potential determinants of corporate guaranteed debt issuance. We find evidence that issuers with fewer tangible assets, lower credit ratings, more pronounced debt overhang and/or greater managerial agency problems are more likely to issue guaranteed bonds. Moreover, we find that while firms generally issue guaranteed bonds with different motives, alternative incentives for guaranteed bond uses are largely captured by bond prices at issuance.

Based on the Competing Values Framework (CVF), we score 10-K text to measure company culture in four types (collaborative, controlling, competitive, and creative) and examine its role in firm stability. We find that firms with higher controlling culture fared significantly better during the 2008–09 crisis. Firms with stronger controlling culture experienced fewer layoffs, less negative asset growth, greater debt issuance, and increased access to credit-line facilities during the crisis. The positive effect of the controlling culture is stronger among the financially-constrained firms. Overall, the controlling culture improves firm stability through greater support from capital providers.